Monday, February 7, 2011; 8:14 PM

DOES BEN S. BERNANKE, the Federal Reserve chairman, deserve the blame – or the credit, depending on your point of view – for Hosni Mubarak‘s plight? Some seem to think so. Last August, Mr. Bernanke announced further Fed asset purchases known colloquially as “quantitative easing II,” or “QEII” for short. The goal was to ease monetary conditions in the United States and fuel growth. But cheaper money lowered the costs and raised the rewards of speculating on food and energy, relative to some other investments. The latest rise in commodity prices began around the time of Mr. Bernanke’s announcement; expensive food triggered unrest first in Tunisia and then in Egypt. Ergo, Mr. Bernanke undermined Mr. Mubarak – or so the argument goes.

Is it a fair accusation? Well, yes and no. QEII does, at the margin, enable commodity inflation, both by incentivizing speculation and by stimulating U.S. growth, which makes demand for food and energy stronger than it would have been otherwise. International commodity prices are set in dollars, so QEII means more dollars chasing the same supply of goods. The Food and Agricultural Organization calls the dollar’s post-September 2010 weakening a “leading factor” in commodity inflation.

Still, Mr. Bernanke was probably right to deny that the Fed is “primarily responsible” for the current price run-up. The spike in wheat prices, which determines the price of bread in Cairo, began before QEII, when drought destroyed Russian crops. Subsequent floods in Australia have destroyed more wheat. As for other foodstuffs and oil, the continuing rapid growth of investment and middle-class consumption in China and India probably explains much recent inflation – just as it will probably drive future price increases in those goods.

This is not to say there’s no U.S. effect. Subsidies and consumption mandates for corn-based ethanol divert scarce crops and cropland – and taxpayer dollars – to a purportedly “green” industry that actually yields very little environmental benefit. Other U.S. policies – such as protectionism for sugar producers and direct payments to cotton farmers – also distort prices. Reforming those misbegotten programs would probably improve global commodity markets more than abolishing QEII, which ends in a few months anyway.

Higher food prices do, indeed, hurt the poor. But the focus should be on alleviating their suffering – not on alleged political effects. Costlier food all by itself is not destabilizing; there are no food riots in democratic India or the Philippines. As Egypt and Tunisia prove, it’s the combination of misery and tyranny that’s combustible.

Earlier this year there was a series of articles in several mainstream newspapers and magazines and on a number of blogs that described labor shortages occurring in China. At the time, I missed all these articles — but now I’ve seen the topic pop up on a couple of tech sites that I visit, and I’ve become interested.

Accordingly, this post is not intended to provide a specific piece of investment advice, but is more an exploration of a news item that I thought might be worth looking into, since so many of us are focused on China as the engine of the global economy.

On the DigiTimes website, an article declares that China’s labor shortages are worsening, particularly in the eastern region. Labor shortages are now an annual issue, but the problem has occurred earlier this year and is more severe. The situation is expected to get worse before the Lunar New Year in February. In particular, the authors quote managers of electronics firms involved in manufacturing flat panels and related components.

One of the companies mentioned in the article indicated that orders for November and December are even higher than those in October, which registered record monthly sales, but added that the labor shortages could affect sales in the last two months of 2010. Essentially, they are implying that they cannot accommodate all the business that is available.

The component makers indicated that labor shortages typically worsen as the Lunar New Year approaches and many workers return to their hometowns. Most laborers should return after the holidays, but some will decide to stay home. Though the labor shortages will ease, manufacturers will have to continue to monitor the issue.

Land of migrant workers?

I never realized this, but many Chinese factory workers are actually migrant workers. In China’s case, migrant workers go from the country to work in city factories. In contrast, what we are familiar with in the U.S. is that migrant workers end up in the country working in farmers’ fields.

There are several reasons contributing to labor shortages beyond holiday vacations. The cost of living in factory towns and cities has increased dramatically, while wages have not nearly kept pace with price increases. Many workers feel it is just not worth it to leave their hometowns and families behind in order to work for wages that, after subtracting basic living expenses, leave little left over for savings or discretionary spending. In the meantime, more and more young people are getting college degrees and are unwilling to work in factories for low wages. This further reduces the pool of potential factory workers.

These cost of living issues are foremost among the many important reasons why the Chinese government and central bank are actively taking steps to slow inflation. And factory managers are finding that they need to offer more competitive wages.

Slowing inflation reassures the workers that they will have some money left in their pockets after payday. Increasing wages will help transform China into more of a consuming economy instead of single-mindedly being a manufacturing/exporting economy. Reducing labor shortages allows Chinese manufacturers to avoid turning down orders. If the government is successful in taming inflation and workers get raises, it could be a win-win situation. With respect to the manufacturers, however, it remains to be seen whether increased sales will offset higher wages.

Given the lag in the effects of government actions and the pace at which wage increases are being rolled out, some company managers are increasingly choosing to build new factories in the western, more rural part of China instead of in the crowded, high-cost eastern half. This in turn has its own effects, some of which are actually very good. It reduces the need for workers to live a migratory lifestyle. It makes it worthwhile for China to continue its binge of infrastructure projects, especially in the energy and transportation sectors (which also happen to provide jobs), in order to make the west more friendly to manufacturing and hi-tech. This will spread prosperity more evenly across the country and reduce social tensions between rural/urban and east/west.

If labor shortages persist, I wonder how China will respond. It’s clear that the nation is reluctant to allow anything to impede the manufacturing juggernaut that has resulted in China being called the world’s factory. Will Chinese companies begin to build factories in other countries? Will China invite in foreign guest workers like Germany did? Similarly, if labor costs increase, will China act like the U.S. and send the jobs to the next lower-cost country — like, perhaps, Vietnam?

It’s a complex issue and an important one, now that China has assumed such a significant place in the global economy. It will be interesting to see how China deals with the situation.

Disclosure: No positions.

Related Articles

• Worker Shortages Seen in Chinese Export Centers (nytimes.com)
• Crippling Worker Shortages Hit China’s Key Manufacturing Hubs (businessinsider.com)
• China’s industrial hubs short of workers: report (marketwatch.com)
• You: Japanese Trainee Program Accused of Exploring Migrant Workers (nytimes.com)
• Shortage of Engineers or a Glut: No Simple Answer (techcrunch.com)

By Rajiv Chandrasekaran and Jon Cohen
Washington Post Staff Writers
Monday, December 6, 2010; 6:02 AM

Afghans are more pessimistic about the direction of their country, less confident in the ability of the United States and its allies to provide security and more willing to negotiate with the Taliban than they were a year ago, according to a new poll conducted in all of Afghanistan’s 34 provinces.

But residents of two key southern provinces that have been the focus of U.S. military operations over the past year say aspects of their security and living conditions have improved significantly since last December.

The new poll – conducted by The Washington Post, ABC News, the British Broadcasting Corp. and ARD television of Germany – found a particularly notable shift in public opinion in Helmand province, where Marines have been conducting intensive counterinsurgency operations. The number of people in Helmand describing their security as “good” jumped from 14 percent in a December 2009 poll to 67 percent now. Nearly two-thirds of Helmand residents now say Afghanistan is on the right track.

In Helmand and in neighboring Kandahar, the percentage of residents reporting threatening nighttime letters from the Taliban has been sliced in half. Public assessments of the U.S. military efforts in the area have also improved over the year, but 79 percent of people in the two provinces say American and allied troops should start their withdrawal next summer or sooner.

The changes in Helmand and Kandahar bolster claims by senior U.S. military officials, including Gen. David H. Petraeus, the top coalition commander, that the application of greater combat power and civilian assistance is starting to make a difference. But the results also lay bare the challenge that remains in encouraging more Afghans to repudiate the insurgency and cast their lot with the government.

“We clearly have to continue to provide the message to the Afghan people about why we’re here and what it is that we want to do, not just for our own national objectives and coalition objectives but also for the people of this country and for the government of Afghanistan,” Petraeus said Sunday in Kabul in an interview with ABC News about the poll.

Nationwide, more than half of Afghans interviewed said U.S. and NATO forces should begin to leave the country in mid-2011 or earlier. More Afghans than a year ago see the United States as playing a negative role in Afghanistan, and support for President Obama‘s troop surge has faded. A year ago, 61 percent of Afghans supported the deployment of 30,000 additional U.S. troops. In the new poll, 49 percent support the move, with 49 percent opposed.

“We want the Afghan forces to be able to control security so the foreign forces can leave,” said Mohamed Neim Nurzai, 40, a farmer from Farah province who participated in the poll.

After a big drop last year, more than a quarter of Afghans again say attacks against U.S. and other foreign military forces are justifiable.

Overall, nearly three-quarters of Afghans now believe their government should pursue negotiations with the Taliban, with almost two-thirds willing to accept a deal allowing Taliban leaders to hold political office. Nearly a third of adults see the Taliban as more moderate today than they were when they ruled the country.

But the surge of U.S. troops and reconstruction funds in Helmand and Kandahar have improved many residents’ perceptions of their quality of life. In Helmand, 71 percent now rate their living conditions as “good,” up from 44 percent late last year, and 59 percent give positive marks to the availability of jobs, up from just 14 percent. In both southern provinces, public assessments of the availability of clean water and medical care are sharply higher than they were a year ago, running counter to trends elsewhere.

U.S. challenge

Although the findings in Helmand and Kandahar amount to a rare dose of hopefulness after nine years of war, the trends elsewhere illustrate the challenges and risks facing the Obama administration and its NATO allies as they seek to marginalize a resilient and adaptive insurgency. Those are among the issues being examined by the National Security Council in its review of the Afghan war, which will be presented to Obama in the coming days.

Senior U.S. military officials contend that the spread of Taliban activity to previously stable parts of the country does not pose an existential threat to the Afghan government, and they argue that security gains in the south will have a spillover effect elsewhere. But Afghans as a whole do not share that optimism.

For many Afghans, security concerns are rivaled by growing economic worries. Two-thirds view the availability of jobs as a problem, and nearly twice as many see things deteriorating as opposed to getting better.

“Aside from security, we have a lot of problems,” said poll respondent Mohamed Nurzaid of Nimruz province. “Joblessness and the prices at the markets keep going up.”

The U.S. government has spent more than $4 billion over the past year on reconstruction and economic development projects in Afghanistan. Two-thirds of Afghans say at least a good amount of the foreign aid money pouring into the country is being misdirected for personal gain by government officials.

For all the perceived pockets of improvement in Kandahar, 55 percent of respondents there say they have been asked for money or other payment from the police in exchange for favorable treatment, well above the national number of 21 percent. Most Kandahar residents feel their situation would only get worse were they to file a complaint about a public official.

Taliban’s image

Support for the Taliban has jumped in Kandahar, where 45 percent now hold favorable views of the group. The same 45 percent of Kandahar residents see the Taliban as having a strong presence in their area.

But nationwide support for the Taliban remains tepid. Afghans overwhelmingly prefer the current government over the Taliban, and almost three in four continue to say it was good that the U.S. military toppled the Taliban in 2001, although that number is nine points lower than it was a year ago.

Despite the U.S. government’s persistent skepticism of Hamid Karzai’s leadership, more than six in 10 respondents feel the Afghan president is doing an “excellent” or “good” job. Fifty-nine percent of Afghans said they believe their country is headed in the right direction, a drop of 11 percentage points from a year ago.

Another change in the country over the year is a 13-point jump in the number of Afghans who say women’s rights are suffering. While majorities of Afghans continue to support girls’ schools, voting rights for women and their ability to work, 50 percent oppose women going outside their home unaccompanied by a male relative.

The poll is based on in-person interviews with a random national sample of 1,691 Afghan adults, conducted Oct. 29 to Nov. 13 by the Afghan Center for Socio-Economic and Opinion Research in Kabul, a subsidiary of D3 Systems of Vienna. Interviews were administered in Dari and Pashto, the country’s two principal languages. The results have a margin-of-sampling error of plus or minus 3.5 percentage points.

chandrasek@washpost.com cohenj@washpost.com

Staff writer Ernesto Londono and special correspondent Javed Hamdard in Kabul and polling consultant Meredith Chaiken contributed to this report.

Related Articles

• You: Afghan poll shows falling confidence in U.S. efforts to secure country (washingtonpost.com)
• Afghans Are War-Weary, Ready for Negotiations with Taliban, Poll Finds (politicsdaily.com)
• Afghans’ faith in U.S. ebbing, poll finds (reuters.com)
• US: ‘Encouraging’ Signs in Afghanistan, But 2014 Pullout Uncertain (waronterrornews.typepad.com)
• Poll: Afghans Lose Confidence In U.S., NATO (huffingtonpost.com)

By Steven Overly
Monday, December 6, 2010; 14

In the spring of 2009, the staff of Human Genome Sciences gathered in an auditorium at the nearby Universities at Shady Grove for one of three companywide meetings held each year.

But chief executive H. Thomas Watkins didn’t prepare departmental reports or formal presentations as usual. Instead, he stood on stage and simply answered employees’ questions for nearly two hours.

The company’s stock had sagged below a dollar. Its then-flagship drug had provoked troubling, and ultimately insurmountable, side effects. And the next product in line was an experimental drug to fight lupus; no new medication had succeeded in helping people afflicted with that dread disease in 50 years.

The prospects looked bleak to many outside the company’s Rockville headquarters.

“Our message that day was, ‘Here is where we are,’ ” Watkins said. ” ‘Here are the things that are going on that are on plan, here’s the things that are a little disappointing . . . but let’s remember what our strategy is, what our direction is.’ “

That direction has brought HGS to where it stands today, poised to produce the region’s next blockbuster drug if Benlysta earns Food and Drug Administration approval.

Benlysta, developed in partnership with GlaxoSmithKline, would not only be among a select number of products born from the genomics era, but its success could catapult HGS into a class of billion-dollar biotechs that is rare in the Mid-Atlantic region.

ROOTS IN RESEARCH

Harvard Medical School researcher William Haseltine started the company in 1992 when much of the biotechnology community was following efforts to map the 20,000 genes in human DNA.

The company attracted large sums of investment capital to fund ambitious research projects.

“They were caught in that frenzy during the ’90s when people knew that biotech had this great potential . . . and [everybody] was throwing a lot of money after it,” said Ric Zakour, executive director of the Tech Council of Maryland‘s biotechnology division. Haseltine “was a big-picture type guy. I think he ran the company very well during that era.”

But smart minds and innovative research had not created commercial products. As investors began to realize the benefits of genomics were years away, the stock value of HGS and many other companies at the time took a hit.

“They were very research oriented and thought they were going to be able to continue on the potential strength of the products they had, but they really had nothing they were able to show for it,” Zakour said.

Curran Simpson, now senior vice president for operations, joined the company eight years ago.

“I try to remember back to when I joined the company and looked at the portfolio of drugs that they had, I couldn’t imagine going from that to where we are now,” he said. “It was a lot of early-stage drugs, who knew if they were going to work, and over the years we’ve watched many of them not work.”

‘THE RIGHT CALL’

In 2004, Haseltine stepped down and the board hired Watkins, then working for Illinois-based Abbott Laboratories, in what represented a shift for the company.

With a background in business management, Watkins brought a more commercial eye to HGS’s research-heavy heritage and during his first year sought to evaluate all of the programs and prioritize those with near-term viability.

“We had a lot of different projects going on,” Watkins said. “They were all interesting and I think had merit. The trade-off we had to make was we’re going to narrow and we’re going to stop some things in service of trying to get something to market.”

Leerink Swann analyst Joseph Schwartz has covered the company for more than a decade. From an investment standpoint, he said, Watkins’s approach resonated with Wall Street.

“It was viewed favorably because I believe at the time they were also facing some capital constraints or at least the recognition that there were finite resources . . . and they were still holding on to a bit of their heritage, which was a land-grab mentality,” Schwartz said.

Inside the company, change came with a bit of upheaval. Some products-in-development were spun off into the company CoGenesys. Employee turnover topped out at around 20 percent, Watkins said.

When the dust settled, the result was a company with three primary products: Raxibacumab, for inhalation anthrax; Zalbin, for hepatitis C; and Benlysta, for systemic lupus.

Raxibacumab proved effective at attacking anthrax toxins in blood and body tissue. But short of government stockpiles, there isn’t much of a market for anthrax treatment and the potential revenue yield wasn’t transformative.

Zalbin, designed to treat hepatitis C, was seen by many as the company’s biggest contender for success. There’s an established market for hepatitis C medications and early indications suggested Zalbin could perform better than those on the market.

But a positive outcome in the drug’s final trials were tempered by negative respiratory side effects. It was March 2009, and the company’s stock plunged to its lowest levels ever.

“When that failed, most people did not give Benlysta any credit before it proved itself successful and that’s why the stock ended up where it was,” Schwartz said.

In October, HGS and its partner, Novartis, abandoned Zalbin.

“We both looked at the same data and concluded the same thing, which is this is going to be a tough one,” Watkins said. “You have to make risk decisions in biotech or any risky business and I think we made the right call.”

FROM SCRATCH TO FINISH

But as the light around Zalbin began to dim, Benlysta posted the first of two successful Phase 3 clinical results. Lupus is a notoriously complex illness and the FDA had not endorsed any new treatments for it in a half-century.

“When the first Phase 3 data hit in June or July of last year . . . that was a wake-up call for a lot of people that the company was on to something,” Schwartz said. There were doubters who thought that the first outcome was a fluke, “and when the second one posted successful as well, that cleared up some of the residual uncertainty,” he said.

Last month, an FDA advisory panel voted 13 to 2 in favor of sending the drug to market, albeit with label stipulations that it has not been tested in patients with the most severe forms of lupus. Federal regulators often follow the committee’s recommendation. On Friday, the company said the FDA is now aiming to make a decision in March.

“You live for years with the very real possibility that you’ll never get there, so when you do, you look back on the odds that you’ve beaten and it’s very inspiring,” said Barry Labinger, who joined HGS as its first chief commercial officer in 2005.

The company’s manufacturing plant now hums every day and night as a bulked-up crew develops batches of Benlysta in anticipation of approval. A sales force of about 70 completed training just last month and may soon be dispatched across the country.

Analysts, including Schwartz, predict Benlysta could produce billion-dollar revenue annually when fully introduced to the market. Patient organizations estimate as many as 1.5 million Americans and 5 million people worldwide suffer from lupus.

A bottom line in the billions would make HGS a financial rarity in this region, where Gaithersburg-based MedImmune is largely trumpeted as the crown jewel.

“We all feel the same way, which is in this local, Mid-Atlantic area there is one really successful company around here. It’s MedImmune,” said Watkins, who chairs Maryland’s Life Sciences Advisory Board. He said a second biotech giant would help recruit skilled workers.

“The more vibrant this community can be, the more options people will have and the less risky they’ll consider it to be to move to this area,” he added.

Related Articles

• Human Genome Sciences Announces Third Quarter 2010 Financial Results and Key Developments (eon.businesswire.com)
• Small Biotech Partnering With Big Pharma For Major Projects – Minyanville.com (news.google.com)
• Novartis takes $590M hit as HGS ditches hep C drug Zalbin (fiercebiotech.com)
• “Advisers recommend Human Genome lupus drug” and related posts (health.am)
• UPDATE 6-U.S. advisers recommend Human Genome lupus drug (reuters.com)

By Robert Barnes
Washington Post Staff Writer
Monday, December 6, 2010; 7:27 PM

The Supreme Court on Monday agreed to hear two major challenges brought by corporate interests, including whether more than 1.5 million female employees of Wal-Mart can go forward with the largest discrimination class-action suit in the country’s history.

The court accepted Wal-Mart’s petition seeking to stop before trial a suit that alleges women were turned down for promotions and paid less than men. The business community has said whether such a huge and diverse group can pursue a class-action suit is one of the most crucial issues facing the court this term.

In addition, the court said it would review a massive environmental suit by eight states, New York City and others targeting power companies for carbon dioxide emissions the states say contribute to global warming.

In both cases, corporations are challenging decisions by federal appeals courts that the suits can go forward. They come before a court that traditionally has been sympathetic to business interests, but is sensitive about recent criticism from the left that it favors corporations over consumer and environmental groups.

In the Wal-Mart case, the justices will not decide the merits of the claims, but looking at the question of whether a single suit is proper when the charges are spread across thousands of stores across the country and involve women in many different jobs.

But the decision about whether a class action suit is allowed could be as important as the veracity of the discrimination claims, and business groups and civil rights activists are squaring off over the implications of the case.

Business groups say certification of a class action puts enormous pressure on a company to settle, regardless of whether the charges can be proved, because of the cost of the litigation and the potential award. For Wal-Mart, the nation’s largest employer, the sum could be billions of dollars.

But civil rights groups say class-action suits are the most effective and cost-efficient way to make sure a business ends discriminatory practices and pays a price for its actions.

Theodore J. Boutrous Jr., lead counsel for Wal-Mart, said Monday in a statement that “the current confusion in class-action law is harmful for everyone – employers, employees, businesses of all types and sizes, and the civil justice system.”

Laywers for the women said they were “confident that the court will agree that the women of Wal-Mart are entitled to their day in court.”

The plaintiffs’ lead co-counsel, Joseph M. Sellers of Washington, said the decisions of a district judge in California and the U.S. Court of Appeals for the 9th Circuit allowing the suit to move forward were “based on a vast body of evidence (and) we are confident that the decision to certify the class was sound.”

The case began in California in 2001, when lawyers filed suit on behalf of six current and former female employees led by Betty Dukes, a Wal-Mart greeter in Pittsburg, Calif. They represent women who worked at Wal-Mart and Sam’s Club stores since December 1998.

Wal-Mart corporate executives “were aware of the adverse impact of Wal-Mart’s policies on female employees, but failed to take steps to eliminate these discriminatory barriers,” wrote Brad Seligman of the California-based Impact Fund, one of the lawyers representing the women.

Wal-Mart lawyers said the unique size of the potential suit requires the involvement of the Supreme Court.

“The class is larger than the active-duty personnel in the Army, Navy, Air Force, Marines, and Coast Guard – combined – making it the largest employment class action in history by several orders of magnitude,” Boutrous said in his brief to the court.

He noted that Wal-Mart has a corporate policy against discrimination.

The case is Wal-Mart v. Dukes. It will be heard in the spring.

The global warming case began in 2004, when New York, California and others attempted to sue the power companies under public nuisance laws for the emissions. The utilities named are the American Electric Power Co., Cinergy Co., Southern Co. Inc. of Georgia, Xcel Energy Inc. of Minnesota, and the federal Tennessee Valley Authority.

The companies argue that individual states spread across the country cannot set emission standards for them. That is the job of the federal Environmental Protection Agency, the say.

A federal judge initially threw out the case, but the U.S. Court of Appeals for the 2nd Circuit in New York said it could continue.

The Obama administration angered environmentalists, when its lawyers sided with the power companies in the case. It said the EPA was working on the problem of carbon dioxide emissions and its efforts should be allowed to continue without intervention from the states.

But environmental groups say the protections are not yet in place and state should be free to act until that happens.

Environmentalists won an important victory at the Supreme Court in 2007 when it ruled that Massachusetts and other states had standing to insist the EPA enforce the Clear Air Act. That case involved motor vehicles.

Only eight justices will hear the case accepted Monday, American Electric Power Co. v. Connecticut. Justice Sonia Sotomayor recused herself because she heard the case as a member of the 2nd Circuit panel. She was nominated to the Supreme Court before the decision was rendered.

Related Articles

• Wal-Mart bias case to top court (bbc.co.uk)
• You: Court to decide if one class-action suit is proper in massive Wal-Mart discrimination case (washingtonpost.com)
• Supreme Court takes up massive labor suit against Wal-Mart (shortformblog.com)
• Supreme Court To Take On Wal-Mart Gender Bias Case (huffingtonpost.com)
• Court to look at huge sex bias suit vs. Wal-Mart (usatoday.com)

Evidence related to the incident does not indicate whether it was deliberate, but computer security researchers have noted the capability could enable “severe malicious activities,” said the U.S.-China Economic and Security Review Commission in its latest report to Congress.

The incident affected traffic to about 15 percent of the world’s Internet network routes, the report said. There are more than 300,000 such routes in the world, said Dmitri Alperovitch, vice president of threat research for the computer security firm McAfee Inc., who briefed the commission on the incident. Among those affected were sites owned by the U.S. Senate, the Army, Navy, Marine Corps, Office of the Secretary of Defense, Department of Commerce and the National Aeronautics and Space Administration, as well as commercial Web sites such as those for Dell, Yahoo!, Microsoft and IBM, the report said.

When a server determines what route to use to speed data to its destination, it consults a “routing table” based on Internet service providers‘ announced routes for networks they host. In this case, China Telecom announced routes for tens of thousands of networks it did not own, including the US government sites, Alperovitch said.

A spokesman for the Chinese Embassy in Washington told Bloomberg News that the report was based on “unfounded, groundless information.” Wang Baodong, the spokesman, repeated the government’s longstanding position that “Chinese laws strictly forbid hacking or other illegal activities” on computer networks.

Whether the incident was intentional or not, Alperovitch said, the fact that China Telecom Corp. was able to reroute so much traffic through its network and then allow it to proceed to the final destination “without much impact is pretty amazing,” he said. The delay in an email reaching its destination might be milliseconds, he said.

Alperovitch, who said McAfee was able to witness and monitor the redirection of the traffic, said the Chinese could have snooped on or even modified the traffic as it flowed through their pipes. They might also have been able to decrypt commercially encrypted files, he said.

Intentional or not, it is the largest successful “hijacking” or rerouting of Internet traffic ever, he said.

The incident is “cause for concern, not alarm,” said Dale W. Meyerrose, who was chief information officer for the Office of the Director of National Intelligence in the Bush administration and is now a vice president for information assurance at Harris Corp. To snoop on the information, he said, “they don’t have to divert traffic per se, though it could make it easier.”

He said that classified U.S. military traffic would be encrypted using standards set by the National Security Agency, which he said are difficult to defeat.

Related Articles

• Report: US net traffic was hijacked through China (zdnet.com)
• Report Sounds Alarm on China’s Rerouting of U.S. Internet Traffic (pcworld.com)
• China Telecom US traffic highjack 15 percent (v3.co.uk)
• Report sounds alarm on China’s rerouting of U.S. Internet traffic (infoworld.com)
• China Web hijacking shows Net at risk (redtape.msnbc.com)
• China Hijack Raises Concerns for Internet Security (pcworld.com)
• China denies ‘hijacking’ internet traffic (guardian.co.uk)
• China Highjacked 15% of World’s Internet Traffic – Or Did It? (readwriteweb.com)

By George F. Will
Thursday, November 18, 2010;

This lame-duck Congress – its mandate exhausted, many of its members repudiated – should merely fund the government for a few months at current spending levels with a “continuing resolution,” then apologize for almost everything else it has done and depart. If, however, the 111th Congress wants to make amends, it should repeal something the 95th did.

In 1977, Congress gave the Federal Reserve a “dual mandate.” Although the central bank is a creature of Congress, it is, in trying to fulfill this mandate, becoming a fourth branch of government.

The Fed’s large, and sufficient, original mission was to maintain price stability – to preserve the currency as a store of value. “Mission creep” usually results from a metabolic urge of government agencies. The Fed, however, had institutional imperialism thrust upon it when Congress – forgetting, not for the first or last time, its core functions – directed the Fed “to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates.” The last two goals are really one. In the pursuit of the first, which requires the Fed to attempt to manage short-term economic growth, the Fed has started printing $600 billion – this is the meaning of what is called, with calculated opacity, “quantitative easing.”

Those running the Fed, says Rep. Paul Ryan (R-Wis.) dryly, “are really putting the fiat in fiat money” – money backed by nothing but trust in the judgment and good faith of the government creating it. The Fed is doing what the executive branch wants done but that the legislative branch will not do – creating another stimulus.

By seeming to do the president’s bidding, the Fed stumbled into a diplomatic thicket. While the president was impotently accusing China of keeping the value of its currency low in order to facilitate exports, many nations were construing America’s quantitative easing as similarly motivated currency manipulation. The primary purpose of quantitative easing might be to force down the yields of government bonds in order to induce investors to invest in corporate bonds and stocks. But when a predictable result of the policy is to devalue the dollar, it is a pointless parsing of words for Treasury Secretary Timothy Geithner, who serves a president who has vowed to double U.S. exports in five years, to say that America will never weaken its currency “as a tool to gain competitive advantage.”

In a 2007 speech, Frederic S. Mishkin, then of the Fed’s Board of Governors, lauded the dual mandate as “consistent with” the Fed’s “ultimate purpose of fostering economic prosperity and social welfare.” Note how easily the mandate to “maximize employment” becomes the grandiose, and certainly political, function of promoting, and therefore defining, “social welfare.”

Mishkin said “the rationale for maximizing employment is fairly obvious”: “The alternative situation – high unemployment – is associated with human misery, including lower living standards and increases in poverty as well as social pathologies such as loss of self-esteem, a higher incidence of divorce, increased rates of violent crime, and even suicide.” Obviously, some of the central bank’s governors have been encouraged by Congress to think of themselves as more than mere bankers – as wizards of social control, even regulating society’s reservoirs of self-esteem.

The Fed cannot perform such a fundamentally political function and forever remain insulated from politics. Only repeal of the dual mandate can rescue the Fed from the ruinous – immediately to its reputation; eventually to its independence – role as the savior of the economy, or of any distressed sector (e.g., housing) that clamors for lower interest rates. Ryan has introduced repeal legislation before and will do so again in January.

Fed Chairman Ben Bernanke has wistfully imagined a day when economists might get “themselves thought of as humble, competent people on a level with dentists.” But that day will not dawn as long as the dual mandate makes it almost mandatory for him to vow that the Fed “can assist keeping employment close to its maximum level through adroit policies.” Even defining “maximum employment” is a political as well as technical act.

Ryan, incoming chairman of the House Budget Committee, says the Fed thinks it can adroitly “put the cruise missile through the goal posts.” But how adroit can Fed management of the economy be? No complex economy can be both managed and efficient, meaning dynamic. To think otherwise is what Friedrich Hayek called “the fatal conceit.” That conceit can be fatal to the Fed’s independence.

georgewill@washpost.com

View all comments that have been posted about this article.

Related Articles

• The Fed’s diplomatic thicket (timesunion.com)
• Geithner opposes narrowing Fed’s dual mandate (marketwatch.com)
• Should the Fed Worry About Unemployment? (dailyfinance.com)
• Should the Fed Focus on Unemployment or Inflation … or Both? (dailyfinance.com)
• Fed should keep full employment mandate: Geithner (reuters.com)
• UPDATE 1-Fed should keep full employment mandate – Geithner (reuters.com)
• Pence Bill Would Strip Fed of “Maximum Employment” Mandate (opencongress.org)
• FED FOCUS-Dual mandate or single, Fed still would ease (reuters.com)
• Warsh pushes back gently on notion of striping Fed of dual mandate (forexlive.com)
• George Will Proves Krugman’s Point on the Axis of Depression (my.firedoglake.com)

By Morris Panner
Friday, November 19, 2010;

As a Democrat whose politics are undeniably liberal on social issues, I lamented the outcome of the midterm elections. But as an entrepreneur with two software start-ups under my belt, I couldn’t help but celebrate – and more than a little. As the fall campaigns wore on, I had found myself listening closely to the Tea Party, nursing the hope that its message would push both major parties to change the way they do business.

To understand my motivation, pick up the November issue of Washingtonian magazine. The annual Salary Survey notes on Page 81 that top trade association leaders (industry lobbyists) make multimillion-dollar salaries to “keep tabs on what the federal government was doing or might do.”

These outsize earnings are symptomatic of a disease that is slowly killing the American economy. We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.

It is always hard to start a business. It is especially hard to start an innovative business, one that will foster a new technology or business method. Incumbent players in a market have an inherent advantage: Momentum counts for a lot, and it takes tremendous effort to get customers comfortable with a new product – or even to hear about it in the first place.

Given the difficulty of starting a company from scratch, and how economic activity is generated today, you can start to see why, if you were a rational market actor, you would be trying to get a piece of the government action.

The combined expenditures of federal, state and local government are rapidly taking over our economy. At the beginning of President Obama’s term, government spending made up 35 percent of gross domestic product. Now, it is up to almost 45 percent, which puts us seventh among advanced economies.

And the Obama administration’s new regulatory initiatives make this considerably worse in subtle ways.

The two largest pieces of legislation enacted in the past two years – health care and financial reform – are very vague. Take the new Consumer Financial Protection Bureau. It has a broad mandate to protect us from financial abuse, but when it comes to the actual implementation, the Brookings Institution wrote that unelected regulators will decide “almost everything” about how the organization works.

This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.

For a preview of what a complex regulatory process looks like, consider our tax system. The World Bank ranks the United States 62nd in the world in terms of how easy it is to pay taxes – and with a 16,000-page tax code, this is no surprise. In 2009 and 2010, Capital Tax Partners, a leading lobbyist representing Goldman Sachs, Apple and others, earned about $20 million in fees, according to the Center for Responsive Politics.

So, what is to be done?

From an entrepreneur’s perspective, we need a national campaign to create transparency in our legislation and a national moratorium on the creation of commissions, regulators and czars. It is time for Congress to do the hard job of saying what lawmakers mean in clear and easy-to-understand language.

It is also fair to hold our leaders to a standard of transparency. We should reject bills that are thousands of pages or that delegate vast authority to unelected regulators.

Entrepreneurs are in an unusual situation. We are staunchly pro-business, believing that new ideas properly implemented can change the world.

Yet we are hardly represented by the business lobbying interests in Washington. Like most Americans, I recoil at the fact that the man who runs the U.S. Chamber of Commerce earns about $3.9 million a year. He doesn’t represent me.

The next two years will be a critical time to see whether all the promises of a more transparent America are realized. If not, maybe it is time to create an entrepreneurs party, where wealth and value creation are prized above rule manipulation and influence peddling.

The writer is chief executive of TownFlier, a software company dedicated to improving digital communication and collaboration.

Writing in Business Week on November 15 (China Offers No Chance of Revaluation before 2012), Gordon Chang takes an honest look at what China is doing. He writes:

Analysts love to say that China is making the transition to a consumer-led economy. But such assertions aren’t consistent with the facts or common sense. The steps that the central government is taking to create trade surpluses — such as holding down the value of its currency — inevitably discourage consumption. The government’s stimulus program, which focuses on building infrastructure and industrial production, is also, by definition, anti-consumption.

The overriding reality is that consumption can’t become significant until Chinese officials, in fact and not just in words, abandon the current investment-led strategy. We need to recognize that low consumption is the inevitable result of China’s growth model, not merely a remediable feature of it, so consumption’s role won’t increase much until the government takes painful measures to change its approach.

Chang points out that China doesn’t change, partly because its leaders are risk averse:

Model-changing is inherently risky, and Chinese leaders are especially risk-averse these days. Before a major transition, when the so-called Fourth Generation leaders are scheduled to give way to the Fifth at the end of 2012, China’s political system won’t be able to implement any radical plans.

Chang’s writing reinforces exactly what my father, son and I wrote in our 2008 book Trading Away Our Future:

By ignoring strategic manipulation of the terms of trade by our more mercantilist trading partners, the United States may create conditions in which strategic trade and mercantilism rather than free trade are in equilibrium for those countries. We are trading away our future for a mess of mercantilist produced pottage! (p. 18)

Has our country ever been more poorly served by incompetent economic leaders? As advocates of unilateral free trade, they insure that our mercantilist trading partners suppress their consumption of our imports.

There is a simple solution: The scaled tariff. Its rate would go up as our trade deficit with a mercantilist country would go up, down when our trade deficit goes down, and disappear when our trade deficit goes to balance. If we were to implement it, China would be forced to take down its barriers to American products, in order to reduce our tariff rate on its products.

China would then stimulate its consumption, perhaps through the steps recommended by Gordon Chang:

What steps are needed? China will have to let the yuan float, permit banks to compete for deposits by offering market interest rates, allow labor to organize and demand higher wages, and provide a better safety net, especially in health care.

Disclosure: I own Chinese yuan through CYB

Lars Christensen, chief analyst and head of emerging markets research at Danske Markets, a unit of Danske Bank, offered attendees at this week’s Third Annual CFA Institute European Investment Conference a ray of sunlight that stood in contrast to the somewhat dreary Danish weather. The outlook for Central and Eastern European (CEE) economies, he said, was “surprisingly good.”

Christensen — a monetarist who authored a book in Danish about Milton Friedman and who co-authored a 2006 paper foretelling Iceland’s financial and economic collapse (pdf) — said that recovery in the CEE economies has continued apace over the last couple of months, supported mostly by a recovery in the manufacturing sectors as well as a strong rise in exports. His macro forecast suggests overall positive GDP growth in the CEE economies this year, with the exception of Latvia and Hungry. Growth in the region in 2011, he maintained, would exceed that of 2010, with little risk of asset bubbles.

The strongest performance in the region, Christensen noted, has been in Poland, where private consumption has been “nearly unaffected by the global credit crisis” and inflation is well under control.

Still, the landscape for investors is far from uniform. Christensen used the Baltic countries, where the bottom has dropped out and recovery is particularly anemic, as an example of how fiscal policy stimulus efforts have exacerbated budget deficits, as in much of the west. Indeed, CEE economies tied to the euro are hampered in their ability to exercise monetary policy since there is no exchange rate flexibility (a problem also evident in Ireland, Greece and Spain, where the strong euro is dragging economies down).

Countries like the Czech Republic and Poland are following non-inflationary, growth-stimulating monetary policies, unhindered by currency considerations. Poland’s budget deficit is creeping up, but it is nowhere near that of Hungary, where inflation remains stubbornly high and where a weak currency should strengthen as government reforms are implemented.

For most of the CEE economies, recovery will be export-led, built particularly around the “Chinese-German axis,” Christensen said.

Still, a possible double-dip recession in the global economy “could kill the CEE export miracle,” he cautioned.

Related Articles

• Emerging Markets Report: Poland’s economy grows 3.5% in second quarter (marketwatch.com)
• East Europe ‘Old-School’ Rate Hawks Unlikely to Prevail in 2010 (businessweek.com)
• East Europe’s ‘Old-School’ Rate Hawks Won’t Prevail (businessweek.com)
• Danish CEOs Say Joining Euro to Take at Least 5 Years (businessweek.com)
• UK inflation taster (ftalphaville.ft.com)
• FOREX-Euro slides, pressured by losses vs sterling (reuters.com)
• RPT-UPDATE 2-Ireland growth at crawl, tough budgets ahead -cbank (reuters.com)
• China slams loose monetary policies (redantliberationarmy.wordpress.com)
• Hungary’s IMF revolt augurs ill for Greece (telegraph.co.uk)
• ‘Hell Week’ Ends With Central Banks Split on Recovery Policies (businessweek.com)